Fannie, Freddie Adequately Capitalized: Lockhart

CNBC.com with Wires

Tuesday, 8 Jul 2008 | 11:36 AM ETCNBC.com

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Mortgage financiersFannie Maeand Freddie Macare adequately capitalized and continue to be active in the mortgage market, said James Lockhart, director of the Office of Federal Housing Enterprise, which regulates the two enterprises.

"Both of these companies are adequately capitalized, which is our highest criteria," Lockhart said in an interview with CNBC. "They have been very active in the mortgage market, and they are continuing to be. And, in fact, Congress has put on them the requirement to do jumbo mortgages and they have been doing those as well."

Lockhart also said OFHEO is working with the Financial Accounting Standards Board, or FASB, on the revision of rule FAS 140, an accounting rule that raised concerns about Fannie and Freddie's capital needs and sparked a steep sell off of their shares on Monday.

Lockhart said the proposed accounting change should not dictate their capital requirements.

Lockhart's comments soothed rattled nerves and helped Fannie Mae and Freddie Mac shares rebound early Tuesday. However, by late morning, the stock were trading mixed.

Accounting rulemakers are considering changing a rule that could force companies to account for securitized assets, such as mortgage-backed securities, on their balance sheets.

Taken literally, it could mean Fannie Mae and Freddie Mac would need a combined $75 billion in additional capital, according to a Lehman Brothers research note published Monday.

"I have to tell you, an accounting change should not drive a capital change," Lockhart told CNBC.

Lockhart on Fannie & Freddie

Weighing in on mortgage practices including the latest news about Fannie and Freddie, with James Lockhart, Office of Federal Housing Enterprise Oversight director

Statements on the possible impact of the accounting rule by Lehman and other analysts on Monday struck a raw nerve for investors already concerned the ailing housing market would create greater-than-expected losses for the government-sponsored enterprises (GSEs).

The GSEs have raised billions of dollars in capital to run their businesses and offset more than $12 billion in combined losses since June. Both have said they do not expect improvement in housing until 2009.

Meanwhile, their equity investors have lost a collective $89 billion as their stock market values have tanked since the crisis erupted last August -- $36.9 billion for Freddie and $52.1 billion for Fannie. Monday's selloff alone pushed shares of the two stocks to their lowest levels in nearly 16 years.

Lockhart stressed Tuesday that Fannie Mae and Freddie Mac "are playing a critical role in this mortgage market" and that their support for housing must be balanced with their ability to make money for shareholders.

Analysts expect the companies will have to raise more capital with common stock, diluting the value of existing shares.

That speculation has been exacerbated by regulators and lawmakers who have pressuring the companies to raise capital for use in stabilizing the housing market that has worsened the U.S. economic slowdown.

"You have to make sure these firms have adequate returns for their shareholders so they can continue to raise capital," Lockhart said.